With the increasing cost of living, it seems that every business/supplier is raising their prices to stay afloat. However, this means that many businesses who were struggling before inflation are now facing serious financial worries.
Dealing with cash flow pressures, late payment fines, increasing debts and HMRC liabilities can be hugely stressful and as a company director, you may feel as though you are drowning.
When a company’s liabilities exceed its assets, it is legally considered to be insolvent. The risk of liquidation is a steep slope at this point. However, rather than burying your head in the sand, it is important you act quickly. Here are five options you may want to consider:
1. Look at your current spending
This is the first action you should be taking when you realise there may be financial issues ahead. Sit down and look through your accounts thoroughly. Are there any subscriptions you no longer use or need, such as software access, team gym memberships, business magazine subscriptions etc.? Make cuts to the unnecessary spends first, before making more difficult financial decisions such as redundancies.
2. Invoice factoring
If you don’t already have invoice factoring set in place, consider doing so as it can be a quick way to raise funding to cover some of your company’s debts. This can be a good option for businesses that have multiple client bills that owe them money and must pay due to contractual clauses.
These future payments can be paid quickly to you by a third party and can then be used to cover debts. This financial aid can be received in as little as two to three working days.
Another benefit of invoice factoring is that it can be done completely confidentially, compared to other forms of insolvency processes that have the potential to scare your customers away once the news has gone public. Losing consumer confidence is a huge risk during this whole process.
3. Offer early payment discounts
If you don’t want to go down the route of invoice factoring, consider offering your customers discounts for paying you early. Alternatively, you could negotiate longer payment terms with suppliers. These will give you breathing room and the cash you need whilst you plan to create a stronger foundation for your business.
When considering early payment discounts, think about what the standard for the industry is and how you can also beat your competitors – this is especially important to keep customer confidence. Lots of invoicing systems now accommodate early payment discounts too.
4. Consider using your company assets as collateral
You may be able to receive a secured loan by using some of the company’s assets as collateral. Technically, this is creating new debt to pay old debt, however it can be an immediate fix to combat immediate cash flow issues and legal damage. In the meantime, other sources of cash flow can be planned or secured to pay off longer term debt.
5. Consider a CVA
If you’ve unsuccessfully negotiated with your creditors, an Insolvency Practitioner can help you to draft and propose a CVA (Company Voluntary Agreement). This is a full document proposing when you are able to pay your creditors back based on how much you can afford right now.
These are done one of two ways – giving a monthly payment contribution from your profits directly to your appointed Insolvency Practitioner, who distributes these to creditors, or by a ‘full and final’ settlement basis.
If the creditor agrees to the CVA, they can no longer petition the court to wind up your business unless you breach the terms of the document, or you end up owing them more money.